Identity theft is the fastest growing crime and consumer complaint in America, and benefit industry experts say concerned employees are seeking protection as an employer perk more than ever. New regulatory certainty about how identity theft protection benefits are taxed could increase the popularity of the benefit as an employer offering.

More than 13 million Americans fall victim to identity theft every year, which means every three seconds someone's identity is stolen. Increased concern about the crime has individuals clamoring for identity theft protection benefits. How that benefit would be taxed, however, had been a topic of some debate in the benefit industry, with some employers eager to offer the benefit but concerned about the impact on employee income taxes.

Just before the new year, the Internal Revenue Service announced some good news and cleared the confusion, further incenting employers to offer the perk to employees.

In its Dec. 30 announcement, the IRS said it will allow preferential tax treatment for employer-provided identity theft benefits, despite the absence of a data breach. Generally, all benefits provided to an employee by an employer must be treated as income, unless the Code provides an exclusion. Previous guidance from the IRS created an exclusion for identity protection services, but only after a breach and only for individuals whose personal information might have been compromised.

“Identity theft coverage is growing in popularity as an employee benefit and being requested by clients more now than it ever has in the past in light of recent data breaches. Standalone ID theft and legal carriers are also enhancing the features of their plans and reducing the cost on the group market to meet market demand. The clarification from the IRS regarding the taxability of this benefit is only going to drive sales of this product even more,” says Heather Garbers, vice president of Voluntary Benefits & Technology for Hub International’s western region. “We project this to be our fastest growing product in 2016 due to these reasons.”

“We view identity theft as a threat that will affect likely affect all of us throughout our lives and identity theft coverage will be a key benefit to have to identify data breaches earlier and make the process to restore identities less of a burden on the employees taking them less time away from the workplace,” she adds.

The IRS’s latest announcement notes that several commenters requested guidance regarding the tax treatment of identity protection services provided before a data breach. According to the commenters, these services are being provided with increasing frequency in order to allow early detection of data breaches and minimize the impact of breaches when they occur. In response, the IRS has concluded that its previous guidance should be extended.

“The IRS will not assert that an individual must include in gross income the value of identity protection services provided by the individual’s employer or by another organization to which the individual provided personal information (for example, name, social security number, or banking or credit account numbers). Additionally, the IRS will not assert that an employer providing identity protection services to its employees must include the value of the identity protection services in the employees’ gross income and wages. The IRS also will not assert that these amounts must be reported on an information return (such as Form W-2 or Form 1099-MISC) filed with respect to such individuals,” the guidance states.

Any further guidance on the taxability of these benefits will be applied prospectively, it adds.

“This guidance is welcome news for employers that want to offer identity protection services to employees as part of their data security strategy. They may now offer these services without increasing their (or their employees’) federal tax liability. However, employers should be mindful of state and/or local tax laws as they may differ from federal tax law,” according to Tzvia Feiertag, a senior associate in the Labor & Employment Law Department of the global law firm Proskauer.

The preferential tax treatment does not apply to cash received in lieu of identity protection services or to proceeds received under an existing identity theft insurance policy, the guidance says.